Here Are The 5 Worst Ways To Pay Off Credit Card Debt
Want to know the absolute worst ways to pay off credit card debt?
Here’s what you need to know – and what to do about it.
1. Skip a payment here, skip a payment there
“Maybe your credit card debt will just go away if you forget about it?” Nice try. Whatever you do, don’t skip your monthly payments. It’s one of the fastest ways to destroy your credit score. You’ll owe more interest and late fees. Even if you’re facing financial hardship, contact your credit card company in advance and discuss potential options. That may sound uncomfortable, but it’s much better than simply missing a payment.
Do This Instead: Sign up for automatic payments so you at least show consistent payments each month.
2. Pay only the minimum payment
“Well at least my monthly payment is not that bad.” News flash: your minimum payment doesn’t have to be your monthly payment. Yes, they can be different. So long as you pay the minimum balance each month, it’s your choice how much extra you want to pay. Remember: interest is always accruing on your principal balance. So paying any amount more than the monthly minimum can lower the cost of your credit card debt.
Do This Instead: You can always pay more than the minimum amount and pay off credit card debt faster.
3. Never make an extra credit card payment
“Extra payment? I barely have enough for my regular payment.” Making an extra credit card payment can be one of the best ways to pay off credit card debt faster. Here’s how it works: in addition to making 12 monthly payments per year, consider an extra payment once every three months for a total of 16 payments per year.
Do This Instead: Be sure to inform your credit card company in writing to apply any extra payment to your principal balance only (not to next month’s monthly payment) to limit the amount of interest that accrues.
4. Never make a lump-sum credit card payment
“Lump sum payment? I’m going skiing in Aspen next week.” Should you use your bonus to pay off credit card debt? Think of it this way. The interest rate you pay on your credit card debt could be higher than the interest on your mortgage, student loans and auto loans – combined. Each day you don’t make a payment means more interest accrues on your debt balance. A lump-sum payment can be any amount — $10, $100, $1,000 or more — and make lump-sum payments as often as you’re able to.
Do This Instead: Whenever you get a pay raise, bonus, tax refund or gift from grandma, make a lump-sum to pay off credit card debt. Make every dollar count.
5. Don’t consolidate credit card debt
Credit card consolidation with a personal loan is often the best strategy to pay off credit card debt faster. A personal loan is an unsecured, fixed-rate loan from $1,000 to $100,000 that is repaid within two to seven years. When you consolidate credit card debt, you swap your credit card debt for a personal loan with a lower interest rate. For example, if you have $10,000 of credit card debt at 15% interest and can obtain a credit card loan at 6% interest, you could potentially cut your interest payments by more than 50%. The lower interest rate saves you money and helps you get out of debt faster.
Of course, you should only consolidate credit card debt if you can qualify for a lower interest rate than you currently have on your credit card debt. You should apply to multiple lenders and consider a qualified co-signer to increase your chances of approval.
Do This Instead: Apply to consolidate credit card debt. You can apply online and funding to your bank account can be within days.
Source: Zack Friedman of Forbes.com